May 9, 2019

How Satya Nadella Has Remade Microsoft Into the Most Valuable Company

Never cool, but always ambitious, the CEO now in his fifth year since succeeding Steve Ballmer, has quietly reinvigorated a behemoth. JL

Austin Carr and Dina Bass report in Bloomberg:

Microsoft was never cool. Nadella’s approach has restored the Microsoft strengths:
the engineering might, the infrastructure plumbing, and, yes, the
ambition. It cut funding to Windows and built an enormous cloud business. The valuation passed $1 trillion and is up
more than 230% since his watch began. Microsoft executives boast they’re part
of a business that’s profitable and boring—but for Microsoft, (it's) a longer way of saying “profitable.”“At Microsoft we have this very bad habit of not being able to push
ourselves because we just feel very self-satisfied with the success
we’ve had. We’re learning not to look at the past.”

The congratulatory texts and tweets started the last week of November. Microsoft had overtaken Apple to become the world’s most valuable company, a stunning climax in a year that also saw it pass Amazon and Google’s Alphabet Inc. Longtime employees, who’d grown accustomed to thinking of Microsoft as far removed from its glory years, when it was run by Bill Gates and feared as the “Evil Empire,” were flooded with messages from friends and family.

Yet not a word of this achievement was uttered when Chief Executive Officer Satya Nadella gathered his senior staff for their weekly meeting that Friday. In an interview at Microsoft Corp. headquarters in Redmond, Wash., Nadella appears irritated by questions about the company’s ascendancy. “I would be disgusted if somebody ever celebrated our market cap,” he tells Bloomberg Businessweek. He insists the valuation—which passed $1 trillion on April 25 and is up more than 230 percent since his watch began in February 2014—is “not meaningful” and any rejoicing about such an arbitrary milestone would mark “the beginning of the end.”
The no-nonsense rhetoric is part of his shtick. Nadella, a 51-year-old engineer with multiple degrees who grew up in Hyderabad, India, is known for his librarian’s temperament. “At Microsoft we have this very bad habit of not being able to push ourselves because we just feel very self-satisfied with the success we’ve had,” he says. “We’re learning how not to look at the past.”

Even if it doesn’t last, Nadella’s turnaround over the five years since he replaced Steve Ballmer as CEO has been nothing short of historic. The company had been universally viewed as spiraling toward obsolescence, having missed almost every significant computing trend of the 2000s—mobile phones, search engines, social networking—while letting its main source of revenue, Windows, the operating system that comes preloaded on PCs, stagnate.
Microsoft marketers like to attribute its reemergence as a tech power to a sort of cultural rehab, involving what Nadella calls corporate “empathy” and a shift of his team from a “fixed mindset” to a “growth mindset.” The reality of the company’s turnaround was more painful, according to interviews with more than four dozen current and former executives, board members, customers, and competitors. Under Nadella, it cut funding to Windows and built an enormous cloud computing business—with about $34 billion in revenue over the past year—putting it ahead of Google and making progress in key areas against the dominant player, Amazon Web Services. “I don’t know of any other software company in the history of technology that fell onto hard times and has recovered so well,” says Reed Hastings, CEO of Netflix Inc.

Microsoft’s Office collection of productivity software, formerly a one-off purchase that included the famously inept virtual assistant, Clippy, is now a cloud-based service boasting more than 214 million subscribers who pay around $99 a year; it has more subscribers than Spotify and Amazon Prime combined. At the same time, Azure, Microsoft’s cloud platform, has won marquee customers such as ExxonMobil, Starbucks, and Walmart. There’s a bit of Silicon Valley cred, too, thanks to its acquisitions of LinkedIn, the professional social network, and GitHub, the software code repository.
Nadella’s peers say Microsoft’s resurgence is as terrifying as it is impressive. When asked what threat a renewed Microsoft poses to the tech universe, the CEO of a rival software company, who requested anonymity to speak more candidly, begins humming Darth Vader’s Imperial March theme from Star Wars. Put another way: The Empire has struck back.

It’s telling that Microsoft continues to instill such feelings in competitors even with mild-mannered Nadella at the helm. If Ballmer will be forever associated with his sweat-soaked dress shirts and “Monkey Boy” antics—he’d barrel onstage at product launches, bellowing and flailing his limbs—then Nadella’s persona is typified by his preferred hygge hoodies. When the board appointed him as Ballmer’s replacement, Microsoft looked trapped by the decline of Windows, which achieved a market share of more than 90 percent at its peak. Windows was still extremely profitable—Microsoft generated a licensing fee on almost every desktop and laptop sold—but people were increasingly replacing PCs with iPhones and Android devices. (Even today, Windows is a $20 billion-a-year business.)

In the past, the importance of PCs had caused executives to compete bitterly for control of various Windows-related fiefdoms and every promising offshoot to get sucked into the Windows vortex. New products were relentlessly branded “Windows,” such as the Windows Phone. Even Microsoft’s fledgling cloud service was called Windows Azure.
Nadella, who’s spent more than half his life at Microsoft, mostly on non-Windows products, stayed out of the Game of Thrones-like war to succeed Ballmer. He’d been recruited from Sun Microsystems Inc. in 1992, in part because his team’s manager wanted an employee who “gets shit done” and “doesn’t piss off other people,” says Jeff Teper, vice president in charge of Office, who hired him. These qualities apparently were recherché in Redmond. Nadella started by selling PCs to corporate buyers. He later oversaw engineering for Bing, the company’s search engine, before taking over Azure.
His self-effacing, if not bland, style is what Microsoft, a bureaucracy crippled by egos and infighting, needed. Colleagues swear they’ve never seen him get upset, raise his voice, or fire off an angry email. Shelley Bransten, a Microsoft corporate vice president, suggests that what makes Nadella unique is that he has “no swagger.” One executive even claims, not quite believably, that he’s never heard Nadella say no.

“Suddenly, everything from Satya was ‘cloud, cloud, cloud!’”

As Ballmer neared retirement, he was so taken with Nadella that he asked Hastings, then a Microsoft board member, to mentor the younger executive. Hastings recalls Nadella coming to Netflix’s headquarters to observe executive reviews. “Ballmer did not have me do that with anybody else,” he says. “He definitely saw Satya as the full package of technical acumen and personality strength, even though Satya manages in a different way than Steve.”
Nadella’s game plan was to reorient Microsoft around Azure, a nascent business he’d been working on since 2011, which would turn the company from a provider of boxed software (which many users simply pirated) to a global computing engine that would rent out its processing power and online storage to businesses. Of the 100 or so CEO candidates considered, Nadella most impressed then-Chairman Gates and the board with his strategic and engineering chops.

Nadella

Photographer: Thomas Prior for Bloomberg Businessweek

Microsoft was already at least four years behind Amazon.com Inc.’s cloud business, which had annual revenue of $4.6 billion. Nadella understood that any serious shift in emphasis would mean taking a cricket bat to the Windows division. (A lifelong fan, he keeps a bat autographed by the great batsman Sachin Tendulkar near his desk.) But getting resources from other parts of Microsoft was like “pulling fingernails,” recalls Scott Guthrie, an executive vice president who took over the cloud unit when Nadella became CEO. He recounts a meeting where the cloud team agreed with Nadella’s strategy, but then realized that as much as 90 percent of the unit’s head count was focused on big Windows-centric businesses. “Classic innovator’s dilemma,” Guthrie says. “I had leaders under me who managed multibillion-dollar P&Ls, and it’s tough when you say, ‘You’re now going to manage a $4 million P&L.’ ”
According to a former executive, Nadella, frustrated with hand-wringing about the new cloud-vs.-Windows hierarchy, scolded a group of top executives early in his tenure. At his Microsoft, there would be only “fixers,” no “complainers.” If people didn’t buy into his vision, he’d tell them, “Don’t stay. Time to move on.” During this time he showed an ability to make aggressive changes with little drama, a departure from Gates’s infamous temper tantrums of the 1990s and Ballmer’s chest-beating of the late 2000s.
Nadella wrote off $7.6 billion from Ballmer’s purchase of Nokia Corp., cutting 7,800 jobs in 2015, a clear sign he was giving up on an ambition to compete directly with Google and Apple Inc. in mobile. His first product announcement was an Office version optimized for Apple’s iOS mobile operating system. Microsoft had resisted such a move for years out of concern that its productivity software running on iPhones and iPads would speed the decline of Windows PC sales.

One longtime executive who recently departed describes Nadella’s approach as “subtle shade.” He never explicitly eighty-sixed a division or cut down a product leader, but his underlying intentions were always clear. His first email to employees ran more than 1,000 words—and made no mention of Windows. He later renamed the cloud offering Microsoft Azure. “Satya doesn’t talk shit—he just started omitting ‘Windows’ from sentences,” this executive says. “Suddenly, everything from Satya was ‘cloud, cloud, cloud!’ ” He also started promoting new buzzwords when he talked about older products, for instance using the phrase “artificial intelligence” when he discussed Microsoft Office, this person adds, “even though there was nothing AI about Office—beside what? spell check?”
The cloud push began gaining momentum, which helped rejuvenate Microsoft’s image and improve employee morale. Guthrie remembers being elated one month when cloud revenue increased by $40,000 on a profit-and-loss statement. “We were like, ‘Oh yeahhh!’ ” he says, chuckling. “And then, ‘Oh boy, we have billions to go.’ ”

The cloud is conceptually thought of as a digital exchange of bits, but it’s actually all about physical infrastructure—airplane-hangar-size data centers and transoceanic cables yo-yoing petabytes of information. Amazon, Microsoft, and the other big cloud players enable other companies to outsource vast computing requirements to these costly infrastructures, which means Netflix can seamlessly stream movies to your phone or Citibank can process billions of online transactions without having to do major construction projects.

By 2016, Microsoft’s board was growing worried the company wasn’t moving fast enough to catch Amazon, which was generating $12 billion in cloud services revenue. The concern was that the corporate-software business could collapse faster than new cloud offerings could replenish the company’s coffers. To refocus entirely on the cloud, Nadella initiated a series of major reorganizations, culminating in last year’s utterly shocking (to longtime Microsoft employees, anyway) termination of the entire Windows division, which he split into Azure and Office teams. By then the cloud war with Amazon had escalated: For every cloud infrastructure improvement and database product Amazon introduced, Nadella would try to match those advances, pumping billions of dollars into buying data centers and startups.

Althoff

Photographer: Thomas Prior for Bloomberg Businessweek

It wasn’t only cloud engineering that had fallen behind Amazon, but also sales. Nadella assigned Judson Althoff, an engineer-turned-sales exec, the task of dismantling the company’s approach of selling licenses based on the number of employees using corresponding software and services. The licenses were complicated to tabulate and tended to make customers feel as if sales reps were IRS auditors. Althoff added 3,000 engineers to the sales division, where they would be expected to write sample code in meetings with potential clients. The blurring of the lines between engineering and sales was designed to improve Microsoft’s pitch and also to expose product teams to the things customers hated. When engineering veteran Corey Sanders joined the group, Nadella jokingly told him, “You’ve screwed up [Azure] for 10 years, and now you have to figure out how to sell it.”
Microsoft won’t disclose Azure’s revenue or say if it’s profitable—the $34 billion figure includes Office—but analysts say its competitive position is improving. The company’s cloud market share went from 14 percent at the end of 2017 to 17 percent at the end of 2018, while Amazon’s was flat at 32 percent for the same period, according to researcher Canalys. An Amazon spokesman notes that the company is still by far the most popular cloud provider. A former Amazon cloud executive, who asked to remain anonymous, puts it more pungently: “Have a little more reverence for the leader. Microsoft has come a long way, but recognize that they’re the Twins and we’re still the Yankees.”
This intense one-upmanship was on display at a recent Azure sales pitch in Redmond, where 20 or so Microsoft employees and senior executives from WPP Plc, the big advertising conglomerate, gathered for an “envisioning” meeting. Nadella appeared wearing a beatific smile, then made a beeline around the conference room table to greet WPP CEO Mark Read.
After introductions, Read offered an overview of WPP’s business challenges, asking Businessweek not to disclose these details. Nadella sat opposite him stirring a cup of tea, nodding theatrically. Then, 13 minutes in, he piped up, pitching a cloud partnership. “We don’t want you to think of this as just building an app on our platform,” Nadella said. “We want to enable you to build your own platform.”
Nadella didn’t acknowledge it, but everyone knew this was a dig at Amazon. Jeff Bezos’ company has been ruthlessly expanding, posing a potential threat to cloud customers, such as big-box retailers and entertainment companies, even as it seeks to store their data in its servers. “Microsoft does it in a tasteful manner, but they don’t leave you mistaken in your impression that Bezos could be lurking in your backyard and machine learning your data and targeting your customers,” says a former e-commerce company vice president who struck a large cloud partnership with Nadella. “In the Ballmer days, it was bluster. But Satya has gotten really good at pointing out, ‘Do you want your technology partner to be your competitor?’ ”

Microsoft has signed five major retailers since July: Albertsons, Gap, Kroger, Walgreens, and Walmart. “You really can’t tell who works for who,” says Rodney McMullen, CEO of Kroger Co., who with Microsoft’s help is building concept stores, with digital shelving displays and AI-driven promotions, in the mode of Amazon’s checkout-free Amazon Go stores. Microsoft engineers are embedded at Kroger’s offices.
Nadella’s strategy has led Microsoft to pass on opportunities that have proven seductive for other tech players. Amazon and Google have pursued autonomous-vehicle hardware, for example, but Microsoft chose not to go after that business, instead focusing on the AI and analytics tools necessary to sell self-driving technology to the likes of BMW, Nissan, and Volkswagen. BMW AG, for instance, is using Microsoft technology to develop an in-vehicle voice assistant—one that can respond to “Hey, BMW,” instead of Amazon’s “Hey, Alexa.” “We are not pushing a Microsoft brand in the car,” says Sanjay Ravi, Microsoft’s automotive industry general manager. “We will give you the brain and provide all the elements to create [your own].”

“Thanksgiving used to be a holiday I really enjoyed”

The company has been particularly successful in industries far removed from software. Azure runs the safety operations for Chevron Corp., analyzing hundreds of terabytes of data from as many as 2,700 wells, while Microsoft’s augmented-reality HoloLens headset allows engineers at Chevron offices in Houston to virtually repair equipment located in the Permian Basin. Collected data is used to optimize drilling efficiencies, but the ultimate purpose is to prevent any Deepwater Horizon-scale disasters. “[A Microsoft VP] said, ‘I get your problem, and I’m going to create a team to solve your problem.’ And that’s exactly what happened,” says Chevron tech general manager Sebastian Gass, seated beneath a poster of an oil-rig-turned-inferno emblazoned with the words “Not on My Watch.”
Microsoft monitors the health of its own infrastructure from Redmond, in a cavernous Azure Cloud Collaboration Center that calls to mind a Norad facility, replete with wall-mounted screens that keep a pulse on hacking threats. Here teams agonize over critical systems Azure is buttressing—hospitals, airplanes, elections. One glitch now has the potential to paralyze a retailer’s e-commerce app on, say, Black Friday. “It’s a little stressful,” says Guthrie, the cloud executive vice president. He now spends that day refreshing Microsoft’s network status. “Thanksgiving used to be a holiday I really enjoyed.”

The Azure command center in Redmond, Wash.

Photographer: Thomas Prior for Bloomberg Businessweek

Despite Microsoft’s successes, critics sometimes hint there’s something empty about the Nadellaissance. The company’s portfolio includes disparate products and services such as GitHub, LinkedIn, and Xbox that have little to do with one another. The big bet on HoloLens is still years away from proving worthwhile financially, if it ever does. And the legacy businesses still at times feel like products of the old Microsoft, not working as well as they could outside of Windows.

The overarching criticism is one that’s persisted since the dot-com bust: Microsoft must regain its hipness. Vanity Fair, in one of the innumerable exposés over the past decade documenting the company’s downfall, pinned its Windows 95 launch, featuring Gates and Ballmer dad-bopping onstage to the Rolling Stones’ Start Me Up, as the moment Microsoft “reached the pinnacle of cool.” Recently, with the company crossing the $1 trillion valuation mark, others have dusted off this narrative, suggesting Redmond has finally recaptured its former flair. “There’s a confidence at Microsoft born of its renewal,” says WPP’s Read. “Microsoft is cool again.”
There’s a flaw in that analysis: Microsoft was never cool. If there’s anything Nadella, the CEOwho recently gushed to colleagues about a fun medieval history book he’d read, has recaptured at Microsoft, it’s Gates’s unreconstructed nerdulence.

This is an important shift. For much of the Ballmer era, Microsoft was chasing a sexy, Apple-like version of itself, and mostly failing. For every iPod, there was a Zune; for every iPad, a Surface tablet; for every iOS device, a Windows Phone. The company was trying to be everything to everyone. At heart, Nadella has Microsoft remembering who it is again in all its Gatesian glory. With that comes the bad: Customers say its cloud services still feel disjointed in a distinctly Microsoft way, and current and former employees say that while the culture has improved, the company still struggles with the same old political infighting and ugly employee behavior. Only last month, internal emails surfaced from dozens of female Microsoft workers who had reported years of sexual harassment and discrimination to senior corporate leaders. (Nadella has since outlined steps to overhaul Microsoft’s human resources practices and how it investigates harassment claims.)
But Nadella’s approach has also restored the classic Microsoft strengths: the engineering might, the infrastructure plumbing, and, yes, the Empire Strikes Back-like ambition. Listen to Microsoft executives boast about their future today, and it’s hard to stay awake among talk of cloud products such as Azure Database for PostgreSQL, Power BI, and Dynamics 365. They’re part of a business that’s profitable and boring—but for Microsoft, “profitable and boring” is just a longer way of saying “profitable.”
On a sleety afternoon recently in Redmond, the campus is full of fenced-off reconstruction projects. In the Den, an executive suite remodeled with Microsoft’s new West Elm aesthetic, Nadella is explaining how his focus is no longer on the “whiz-bang”—his word to describe the Zune-era Microsoft. Instead, what it’s gotten better at, he says, is “being superdisciplined.”
Microsoft survived an innovator’s dilemma, but it also, so far, survived an identity crisis. “If you keep changing who you are, there’s no chance,” Nadella says, leaning forward on his couch. “We learned from our habits in the past, where we feel like, OK, you can’t be one company and then suddenly, because you’re very successful, do something else. It just doesn’t work.”

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As a Partner and Co-Founder of Predictiv and PredictivAsia, Jon specializes in management performance and organizational effectiveness for both domestic and international clients. He is an editor and author whose works include Invisible Advantage: How Intangilbles are Driving Business Performance.Learn more...